Contractual limit of indemnity (first loss limit)

In a classic property policy, the insured declares the value of its property, and if that value proves lower than reality on the day of the loss, the average rule reduces the indemnity in the ratio of declared to actual value. For large companies with many sites, this mechanism is cumbersome and risky. The contractual limit of indemnity replaces it with a per-loss ceiling agreed between insured and insurer, often based on an estimate of the maximum possible loss at the most exposed site rather than on the total value of the assets. As long as the loss stays below this ceiling, it is paid in full, without applying the average rule, provided the declared values served as a good-faith rating basis. The insured thus buys cover suited to its real risk, since a fire never destroys all its sites at once, for a lower premium than total-value cover. In return, if a loss exceeds the limit, the excess is its own. Sizing the limit therefore relies on the quality of the maximum loss estimate, and risk surveys play a central role in it.